The Confederation Bridge, connecting Prince Edward Island and New Brunswick, cost $1.4-billion when it was built in the fiscally turbulent 1990s. With enormous deficits and soaring debt, the federal government had undertaken a radical austerity program that was rationally inconsistent with such an extravagant expenditure: the biggest bridge-building project, at the time, in the world. How to keep the bridge off the federal books for 35 years? Simple. Use a surrogate. Bill a ghost.
The federal government borrowed nothing. Financing for the bridge was arranged by Strait Crossing Finance Inc. (SCFI), established for this specific purpose as a Crown corporation of New Brunswick. Though legally secured by the federal government, the bonds that financed the project did not appear as a liability on the federal books.
SCFI was obliged to pay a higher interest rate, of course – 4.5 per cent per year instead of 4.1 per cent, a penalty of 10 per cent on bond sales that exceeded $600-million. It was obliged to pay higher commissions on the transactions (1.7 per cent rather than 0.6 per cent). And so on. But whatever the honest cost, it remains mostly out of sight and mostly out of mind.
None of this federal obscurantism detracts from the tremendous success of the famous “fixed link.” However disingenuously financed, the bridge remains a historic achievement. We have a remarkable bridge that will deliver an essential service for a hundred years. And tolls will pay most of the cost.
Yet by 2030, when Ottawa assumes ownership of the bridge, the mysteries of the flamboyant fiscal subterfuge will have been long lost in the mists of time. Greece itself could not have made a billion dollars disappear from government books more surreptitiously.
Although the federal government did eliminate its deficits in the 1990s, government debt is, for the most part, eternal – eventually paid off not so much by the virtuous payment of interest charges on long-term bonds but rather by the inexorable ravages of inflation. And inflation, of course, is a federal tax that robs money of its value. By the time inflation pays off any specific dollar of debt, people have long since forgotten its original purpose. But with capital projects, such as the Confederation Bridge, an asset equal to the debt has been created.
This is more than you can say for the debt that gets spent to pay for current consumption. This debt bequeaths no asset, provides no return on investment. The transfer payment is gone; the debt lives on, for all practical purposes, forever. It is this kind of debt that democratic electorates around the world are now so reluctant to pay. People apparently want the welfare state but they refuse – universally – to pay for it. How much public spending is thereby rendered illegitimate? You can measure it as the sum that governments borrow to top up spending on quick consumption.
Not coincidentally, it was in 1997, the year the Confederation Bridge opened, that federal interest payments reached 30 per cent of the government’s spending. (The precise percentage: 29.8.) Federal interest payments were by far the government’s largest spending program. Even now, with interest payments consuming only 11 cents of the federal expenditure dollar, they still constitute the country’s No. 2 expenditure – after federal spending for old-age pensions (which costs 13 cents on the expenditure dollar).
Federal health transfers now cost 10 cents of every federal dollar spent. Social-welfare transfers, 4 cents. Children’s benefits, 5 cents. Defence, 8 cents. EI benefits, 7 cents. Et cetera. In 2012, the GST will barely produce enough revenue to make our federal interest payments. These interest payments exceed $30-billion, enough money to build 20 Confederation Bridges. Combined with provincial debt charges, interest payments exceed $50-billion, enough money to build 33 Confederation Bridges a year – indefinitely.
The point is simply this: That money spent on interest payments cannot be spent on any other public priority – and necessarily takes precedence over all other money spent on all other priorities. Public debt accumulated for instant consumption is, indeed, bondage. Why? Because “pay now” becomes “pay later” and “pay later” becomes “pay never.” As demonstrated throughout Europe in the past couple of years, people are quite prepared to sit on their hands when the bill arrives at the all-you-can-eat diner of the debt-financed welfare state.